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Comparative Analyses of Expected Shortfall and Value-at-Risk (3): Their Validity under Market Stress

Author

Listed:
  • Yamai, Yasuhiro

    (Institute for Monetary & Econ Studies, Bank of Japan)

  • Yoshiba, Toshinao

    (Institute for Monetary & Econ Studies, Bank of Japan)

Abstract
In this paper, we compare value-at-risk (VaR) and expected shortfall under market stress. Assuming that the multivariate extreme value distribution represents asset returns under market stress, we simulate asset returns with this distribution. With these simulated asset returns, we examine whether market stress affects the properties of VaR and expected shortfall. Our findings are as follows. First, VaR and expected shortfall may underestimate the risk of securities with fat- tailed properties and a high potential for large losses. Second, VaR and expected shortfall may both disregard the tail dependence of asset returns. Third, expected shortfall has less of a problem in disregarding the fat tails and the tail dependence than VaR does.

Suggested Citation

  • Yamai, Yasuhiro & Yoshiba, Toshinao, 2002. "Comparative Analyses of Expected Shortfall and Value-at-Risk (3): Their Validity under Market Stress," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(3), pages 181-237, October.
    • Handle: RePEc:ime:imemes:v:20:y:2002:i:3:p:181-237
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    File URL: http://www.imes.boj.or.jp/research/papers/english/me20-3-6.pdf
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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